IDFC 4Q11: Non-infra business pains ::Macquarie Research

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IDFC
4Q11: Non-infra business pains
Event
 Numbers below our estimates due to higher provisions: IDFC announced
4Q11 results on Friday. Its consolidated net profit at Rs2.86n came in 7%
below our estimates mainly due to higher provisions. The higher provisions
were mainly on account of some hits taken on the equity portfolio. Maintain
Outperform with TP of Rs170.

Impact
 What is happening in non-infra/non-prop business? If we look from a full
year perspective the contribution of other businesses to overall group profits
has come down to a mere Rs40mn in FY11 (Consolidated minus standalone
profits). If we adjust for the dividend payouts that subs do and which gets
captured in FY11 numbers of the standalone entity, the actual difference is
closer to Rs600m in FY11 i.e. Rs600m contributed by the non-infra, non-prop
business and infra business contributing close to Rs12.2bn of profits – so a
mere 5% coming from other businesses. A closer look at the numbers reveals
that employee expenses in non-infra business are twice the expenses
incurred in the standalone business. Investment banking business is hypercompetitive
in India whereas the AMC business has got affected due to
regulatory changes. Management though justifies that any profit it generates
in these businesses is RoE accretive as they don’t consume any capital.
 Spreads compress, but now running a favourable ALM: IDFC doesn’t
report spreads on a quarterly basis but on a 12m rolling spreads and they
have compressed 20bps QoQ. It has brought down its dependence on short
term borrowings significantly (now down to 5% of overall funding) due to
which duration of liabilities has gone up from 2.35yrs to 2.74 yrs whereas
duration of assets is around 2.07 years. The management clarified that
incremental lending spreads for the past 3 quarters have been stable.
 Balance sheet growth remains healthy, however fresh sanctions are
down: IDFC’s loan growth was 50% YoY which was mainly due to strong
disbursement growth seen in the energy sector. Since much of the 3yr target
of doubling the loan book was front ended, we believe the company can
achieve 25-28% growth over the next two years to meet its stated target.
Fresh approvals are down 55% YoY.
 Accounting adjustment done this quarter: IDFC used to consolidate
line by line its income, expenses etc from certain jointly controlled entities,
which is now no longer being done. Hence, loan syndication fees and
expenses this quarter are down and, on a net basis, the impact is around
Rs20m, which will no longer be accounted/consolidated for.
Earnings and target price revision
 No Change.
Price catalyst
 12-month price target: Rs170.00 based on a Sum of Parts methodology.
 Catalyst: Improving liquidity scenario, fall in wholesale funding rates
Action and recommendation
 Maintain outperform with TP of Rs170.